The London Stock Exchange’s sale of Borsa Italiana to rival Euronext is yet another example of merger and acquisition (M&A) activity in the hotly contested European stock exchange ecosystem.
On 9 October, Euronext, which is Europe’s largest stock exchange controlling markets in Amsterdam, Dublin and Paris to name a few,announced it was acquiring Borsa Italianafrom the LSE for just over €4.3bn.
It is well documented the benefits of owning multiple exchanges. By joining forces, there are a number of efficiencies the exchanges can create. According to Fitch Ratings, a merged exchange can create more liquid and visible markets with a larger group of investors from both sides of the newly formed group.
“In turn, this will likely lead to greater interest from equity capital investors (ecm) and from potential listing candidates alike, allowing bourses to reap economies of scale,” Fitch said in a report. “Given that such clear benefits are on offer, it is hard to see the M&A trend of stock exchanges abating anytime soon.”
This was underscored by Deutsche Boerse’s CEO Theodor Weimer who admitted last year the firm is “constantly” screening for M&A opportunities.
The LSE’s deal with Euronext, however, is reliant on one factor; its $27bn takeover of Refinitiv being given the green light by the European Commission.
The European Union’s antitrust regulator, which has signalled plans to reject the deal in its current form, has set a new 16 December deadline for its decision.
According to Bloomberg, the European Union is set to provide the LSE with a charge sheet in the coming weeks to highlight its key areas of concern, two sources have said.
The reason for the European Commission’s concerns is the deal, which was announced in August 2019, would create a “quasi monopoly” in Europe’s bond markets.
Refinitiv owns bond trading platform Tradeweb which would supplement FTSE Russell’s bond indices, LCH Clearnet’s collateral rules and most importantly Borsa Italiana’s MTS platform.
According to Johannes Petry, ESRC Doctoral Research Fellow at the University of Warwick, MTS is a critical piece of European bond market infrastructure accounting for average daily trading volumes exceeding €100bn.
Having Borsa Italiana’s MTS and Refinitiv’s Tradeweb under one ownership is the primary concern of the regulator and the key reason why the LSE is looking to offload the Italian exchange.
While this may not be enough to convince the European Commission that the deal will not create significant anti-trust issues, it should go some way in easing the regulator’s worries.
Coronavirus turmoil highlights need for harmonisation across European exchanges
In 2017, the regulator put a stop to the proposed £21bn merger between the LSE and Deutsche Boerse for similar reasons and the UK exchange will be hoping the EU is more favourable this time around amid a backdrop of strained Brexit relations.